In this three-part series, we describe the primary methods a small business can use to pay its bills and examine the advantages and disadvantages of each

Part II: Credit Cards

By Christopher Freeburn

Credit card use is rising not only among consumers, but among small business owners as well. According to the 2009 National Small Business Association (NSBA) survey, 59 percent of small business owners had used credit cards within the past 12 months to fund the ongoing operation of their businesses.

Part of the reason for the rise in credit card use is the ease and convenience of using them. But credit cards also provide financial flexibility that other means of payments including checks, simply do not offer.

Business credit cards

While using your personal credit cards to operate your business may seem convenient, doing so exposes you to some significant disadvantages. Putting your business's expenses on your personal card runs up your personal debt and raises the percentage of your available credit in use, an important metric that the three major credit rating agencies closely track to determine your creditworthiness. If the gap between your credit used versus credit available shrinks too much it could result in a lowering of your individual credit score and a raising of your credit card interest rates.

"Too many small business owners-particularly very new business owners-think that their business is too small to qualify for a business credit card, so they don't even apply for one," explains Jim Sheridan, a Boston-based business consultant. This is a mistake. "Banks view small businesses as an important market and are aggressively marketing all sorts of financial products to entrepreneurs, especially business credit cards," Sheridan adds.

Competition among credit card issuers has produced a myriad of different business credit cards with differing introductory interest rate offers and discounts on business supplies and services. Properly used, these can mean significant savings for small business.

Maximizing cash flow

Perhaps the biggest benefit of credit cards for small businesses is the ability to keep operations going during periods of low revenues and stagnant cash flow. This is particularly true for businesses that have cyclical periods of operation, or do especially well during certain holidays. During these peak periods, revenues increase and the business has excellent cash flow. During off-peak periods, however, revenues contract. Credit cards permit the business to purchase needed supplies and services during these off periods and briefly defer payment until revenue ticks up again.

Recurring bills

Most businesses have recurring monthly bills, including telephone, Internet, cell phone, utility, and rental payments. Writing checks to cover each of these bills is time-consuming and generates lots of paperwork. Credit cards, on the other hand, permit a business to automate these necessary, but cumbersome monthly payments. Most business-service providers will allow you to charge your bill on a credit card and are only too happy to configure your account so that the bill is automatically charged to your credit card on a specific date every billing period. Not only does this relieve you of the distraction of opening the bill, writing a check, and mailing it back, but it saves you from the pitfall of forgetting the bill or sending in the check too late and thus incurring penalties from the service provider. As an added benefit, credit card billing provides clear and comprehensive records of the transaction. Your business will also save money on stamps and checks.

Shop around for deals

"Virtually every bank has some sort of program tailored to small businesses," says Gerri Detweiler, author of The Ultimate Credit Handbook. In order to get the most out of the various incentive programs, Detweiler says that a business should have several different credit cards. "Different cards offer different sets of discount and rewards programs," she explains. "One card might offer discounts on office supplies purchased at specific retail chains like Staples or Office Depot, another card might feature discounts on airline fares or gasoline purchases." Perhaps not surprisingly, last year's NSBA credit card survey found that nearly half-46%-of small business owners had three or more business-related credit cards.

Aside from discounts, some cards offer "reward points" for specific purchases. These points are redeemable for other goods or services, based on the amount charged on your cards. Given the great variety of cards on offer, Detweiler recommends shopping around for the best deal. "You need to compare interest rates, paying particular attention to the rate after the introductory period expires, as well as any discount programs offered. Look at as many cards from as many banks as you can."

Better control

Most business credit card programs will allow multiple credit cards for the same account, permitting you to give company credit cards to your trusted employees. In addition to permitting those employees to make purchases on behalf of the company, thus freeing you from the task, these cards also provide tangible evidence to the employee of just how valuable you consider their efforts for the company.

For your company's protection, you can generally set up controls on cards handed out to employees. Such controls include spending limits and restricting the card to certain types of purchases (office supplies, etc.) or even specified vendors. Still, you will remain responsible for any charges made by an employee using your company's business credit card, even if the charges are unauthorized. So it is best to limit company credit cards to your most trusted and senior employees who are already in a position to make purchases for the company. It is also wise to personally review the charges made on each company credit card (which can be listed individually in your overall statement) to make sure there are no suspicious charges. Many business credit cards feature some sort of alert feature that will trigger an email or phone call in the event of a questionable charge.

Be sure to come back for Part III in our series, which examines online payments as a means of meeting a business's financial obligations.

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